The Federal Government is well underway to restructure the economic system to be more in line with high-income countries, and create new growth areas to increase productivity and income.
Economy Minister Rafizi Ramli said for a country with low revenue and persistent poverty and inequality rates, a blanket subsidy and social assistance model is simply too regressive. The blanket subsidy model eats up the already-limited social spending budgets. At the same time, broad-based social assistance programs are often received by richer households that do not need them, and they dilute the value of these programs for the needy.
In 2024, the government will introduce the targeted subsidies system that will help free up the much-needed fiscal space for the government, while also reducing poverty and inequality at the same time.
Conceptually this is very appealing because by redirecting high-priced subsidy items to an expanded social assistance — at no extra cost — this could reduce poverty by 2.0 to 5.6 points, according to the World Bank’s simulation (MEM, Oct 2023).
Central database hub (PADU) will be launched to implement targeted subsidies
Direct transfers are also estimated to be four times more cost effective at reducing inequality than subsidies.
This is on top of the fiscal savings that will be accumulated for other more efficient uses.
Only through doing this could the poverty and inequality rates that stayed largely unchanged (or even increased) for the past 10 years finally start to decline again.
At the same time, Rafizi said: “We are keenly aware that the wage problem must be addressed by any responsible government. When the median wage of RM2,600 per month is only RM11 above the poverty line (RM2,589 per month) and half of all Malaysian workers earn only slightly more than the minimum wage, we cannot take a wait-and-see approach any longer.”
Leaving it to the market to self-correct may exacerbate both income inequality and the CE ratio (compensation of employees to GDP). Today, the Gini index of income inequality is worse than most in Asean, recently transitioned high income countries, and OECD countries.
“Our CE ratio has also fallen for the past 2 years, putting us behind countries like Japan, South Korea, and Philippines,” he added.
He explained that the government has committed to implementing the progressive wage policy that will be voluntary, incentive-based, and productivity-linked. This is the only wage model that satisfies the main stakeholders of the employers and employees, as it rewards rather than penalises employers, and it keeps a close eye on the productivity increases of workers, which we make a condition for this policy.
That is the thinking behind the Ministry of Economy’s painstaking 12-month effort to create a centralised database (PADU) with a granular view of households. For subsidy retargeting to work, “we ought to identify households by their income, location, and commitments, to get a view of their net disposable incomes in order to calculate how much to give in subsidies.”
But PADU, he added, is also about social assistance so that we ensure that the right recipients receive the right amount, and we avoid the problems of benefits dilution and unfair distribution. On top of that, a central database with administrative data also opens up opportunities for GovTech, Digital ID, and product-building as we build forward momentum from this method of sequencing.
Beyond the “What” and “How” — the final ingredient for structural reforms is the “Who”. Who shall succeed in carrying tough reforms through? Rafizi said during his address at the launch of The 28Th Malaysia Economic Monitor: Raising The Tide, Lifting All Boats today, adding, the government must have courage to stay on course with structural reforms and not let uncertainty and unpopularity get in the way.
